The Panama Canal

Summary

The Panama Canal, which was completed in August 1914, uses locks and Gatun Lake’s water to move ships. Each transit drains freshwater. Worsening El Niño droughts threaten the canal’s future operations.  

Breakdown

Economic Impact 

The canal facilitates 5% of the world’s trade and 40% of the entire volume of US imports and exports, generating 6.6% of Panama’s GDP, which equates to $4.32 billion in annual revenue. Each ship transit requires 52 million gallons of freshwater across all sets of locks. An El Niño event would naturally occur once every 7 years. However, having increased in frequency, such droughts result in an extra $200 million expense for the canal’s annual costs. An example of this is the 2019 drought which drastically halved the daily passage of ships from 36 to 18. Additionally, each ship’s cargo loads were reduced by 40%, ensuring they would safely float on the reduced water level.  

The Panama Canal authority has tried to take advantage of this drought crisis by issuing extra slots for ships to avoid long queues. With one crossing slot being sold for a record $4 million, the canal’s reduced capacity places economic burdens on countries and shipping companies. A solution could be to dam the Indio River and drill a tunnel through the mountain, connecting it to Gatun Lake, to raise water levels. However, the U.S. would have to fund another $900 million to complete the 6-year project. The plan is currently being debated as environmental consequences are considered. Such mass flooding risks destroying biodiversity across the land and displacing local communities.  

Alternative Latin American trade routes to ease pressure on the Panama Canal include: 

• The Bioceanic Road Corridor, the first half of a dual-carriage motorway inaugurated by Paraguay in 2022, which will stretch from Chile through Argentina and Paraguay, ending in Brazil.
• Part of a $2.8 billion railway project to compete with the canal by transporting goods between the Pacific and Atlantic oceans, inaugurated by Mexico on the 22nd of December 2022.

Unfortunately, the revenue generated by such routes pales in comparison to the $270 billion worth of cargo generated by the canal. Due to the money-orientated nature of the companies and businesses involved, the canal was expanded without increasing its water supply, so it does not currently function at optimum capacity. This has caused significant delays to cargo, making goods more expensive as suppliers seek to recover their losses.  

Legal Impact 

Annually, between 13,000 and 14,000 ships cross the canal, causing delays and even accidents which damage cargo. Consequently, the Panama Canal’s turbulent operation directly impacts future sale contracts dealing with delays and extra costs. To mitigate such risks, revised clauses of delay, detention of the vessel and force majeure provisions are inserted into contracts.  

Under English law, frustration is only accepted if it can be proved that contractual performance is impossible. Where performance is delayed or more expensive to honour, this will not apply. Some considerations include the attribution of liability for additional costs associated with the carriage of goods if such costs can be passed down the contractual chain and any demurrage clauses apply. Where the latter is found, insurance claims for damage during the process of loading and unloading cargo can be sought. A demurrage clause involves parties agreeing that the charterer (merchant) pays the supplier (owner of containers) for any delay to the delivery of the goods, including loading or unloading times. 

Cargo is insured in case of loss and damage on standard terms like the Institute Cargo Clauses. This insurance covers risks of accidental physical loss or physical damage to the cargo caused by external factors. The insurance is limited for certain classes of expense relating directly to covered physical risks to which the cargo is exposed. Standard insurance will not cover financial losses incurred by reason of interruption, disruption, delay, extra cost, loss of market or the carrier’s insolvency or financial default.  

Although the insurance continues during transit, delay, or deviation out of the carrier’s control, where the cargo does not reach the contractually agreed destination, or the carrier terminates the journey for an unreasonable purpose, the contractual term will terminate, unless the insurer is given reasonable notice. Disruptions caused by the drought may lead to contractual breaches or even frustrate the contract of carriage. If the delay becomes indefinite or prolonged, the carrier can divert from the intended voyage, but the insurer must be notified, and the initial contractual terms risk becoming unenforceable.

Future Outlook

The Panama Canal should be carefully controlled to avoid overuse and saturation, leading to severe droughts which impact trade and the wider global economy.